On Monday, the 2nd of February, 2015, the Department of Treasury released the Obama Administration’s 2016 Budget (Green Book). As the Republicans won the majority of seats in the House of Representatives in the 2010 midterm elections, it is likely that the Budget will not become law. But the U.S. is still in a deficit even though it is deficit has been decreasing as reported in The Wall Street Journal and is currently approximately $483.35 billion – a figure that should continue to give concern to tax practitioners and rightly so. The following provides a summary relating to the proposed changes estate and gift tax sections of the Internal Revenue Code by the Budget.

Estate Tax and Generation Skipping Tax (GST)

Currently both the estate tax and the generation skipping tax exemptions are indexed for inflation. The exemption is $5.43 million with the top rate set at 40%. The GST exemption allows planners to use the exemption to transfer $5.43 million currently into a trust wherein the beneficiaries are two or more generations younger than the settlor. Such trusts are usually referred to as Dynasty trusts.

The Budget proposes to reduce the Estate and the GST tax exemption to its 2009 levels. In 2009 the exemption was $3.5 million. The Budget also proposes to increase the top rate to 45%. The Budget proposes to restrict the GST exemption only to the 90th year of the creation of a trust.

Gift Tax

Currently the gift tax is tied to the estate tax. One can gift up to $5.43 million during one’s lifetime but must keep track of gifts over $14,000 to any one person as such h gifts will count against the eventual estate tax exemption amount. No need to worry about exceeding the limit where the gift is to a U.S. spouse. For 2015 the annual exclusion to a non-US spouse is limited to $145,000 per year. Any amounts gifted over the exclusion must be reported on IRS Form 709. It is advisable for taxpayers to keep copies of their Form 709s filed so that it is easier for the executor to calculate the estate tax exemption.

The proposal aims to untie the gift tax exemption from the estate tax exemption. The life time gift exemption would be reduced to $1 million.

On page 204 of the Green Book, the proposal is to aims to define a new category of gift exemptions and would impose an annual limit of $50,000. This new category will be indexed for inflation. On page 205 of the Green Book:

Thus, a donor’s transfers in the new category in a single year in excess of a total amount of $50,000 would be taxable, even if the total gifts to each individual donee did not exceed $14,000. The new category would include transfers in trust (other than to a trust described in section 2642(c)(2)), transfers of interests in passthrough entities, transfers of interests subject to a prohibition on sale, and other transfers of property that, without regard to withdrawal, put, or other such rights in the donee, cannot immediately be liquidated by the donee. (emphasis mine).